Surface nearing $2B in revenue, cloud continues to be strong.

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Microsoft has posted the results of the second quarter of its 2019 financial year, which runs up to December 31, 2018. Revenue was $32.5 billion, up 12 percent year on year; operating income was $10.3 billion, up 18 percent; and net income was $8.6 billion, as compared to a $6.3 billion loss due to the impact of the Tax Cuts and Jobs Act one year ago. Earnings per share were $1.08, as compared to a loss of $0.82.

Microsoft currently has three reporting segments: Productivity and Business Processes (covering Office, Exchange, SharePoint, Skype, Dynamics, and LinkedIn), Intelligent Cloud (including Azure, Windows Server, SQL Server, Visual Studio, and Enterprise Services), and More Personal Computing (covering Windows, hardware, and Xbox, as well as search and advertising).

Productivity group revenue was up 13 percent to $10.1 billion, with operating income up 20 percent to $4.0 billion. Commercial Office revenue was up 11 percent, with seat growth of 27 percent; this growth continues to be driven by the shift to cloud, with Office 365 revenue up 34 percent but perpetually licensed revenue down 21 percent. Consumer Office revenue was almost flat, growing by just 1 percent. This drop in growth comes after a series of strong quarters; a year ago, Office consumer revenue was up 12 percent, with the intervening quarters showing growth of 12, 8, and 16 percent. Microsoft says that Office 365 subscriptions were up, now totaling 33.3 million, but the weaker-than-expected PC market offset this growth. Dynamics revenue grew by 17 percent, and LinkedIn by 29 percent.

Intelligent Cloud revenue grew 20 percent to $9.4 billion, with operating income up 16 percent to $3.3 billion. Overall, there was a split between server product and cloud revenue, growing 24 percent, and Enterprise Services, up 6 percent. Azure revenue was up 76 percent (identical to the previous quarter) suggesting that perhaps the days of Azure growing by 90 or more percent year on year are behind us. Azure is still growing vigorously, but as it becomes larger and more mature, the near-doubling each year that it enjoyed before becomes harder to achieve. It remains an area of significant investment, with Microsoft expecting capital expenditure to grow moderately. On-premises server product revenue was up 3 percent, with the newly acquired GitHub providing some of that growth. Microsoft now has some 94 million seats managed with its Enterprise Mobility Suite, up 57 percent year on year.

The More Personal Computing division saw revenue growth of 7 percent to $13.0 billion, with operating income up 18 percent to $3.0 billion. After several quarters that saw commercial-oriented Windows Pro revenue grow, this quarter saw it fall by 2 percent year on year; the decline of the consumer-oriented Windows revenue also fell more sharply than in previous quarters, declining by 11 percent.

Intel issues

The slowdown of the PC market is widely observed, but Microsoft's commentary on it this quarter was perhaps a little surprising. CFO Amy Hood described the market as "otherwise healthy" but said that OEMs were hit by the "timing of chip supply," reducing Windows OEM revenue by some 1.5 percent. Though Hood didn't name names, this statement suggests that Intel's continued difficulties in moving to 10nm manufacturing is causing issues for the wider PC market.

There are likely two aspects to this. First, there appears to be a limited supply of 14nm chips. Intel had expected its 14nm manufacturing capacity to at this point be supplemented by 10nm; since that hasn't happened, the company has found itself with more demand for 14nm manufacturing than it can fulfill. The chip company has made additional investment to increase 14nm capacity, with upgrades in Ireland, Israel, and New Mexico, but this isn't instantaneous.

Second, the 10nm processors coming later this year will use a new architecture that gives the first meaningful improvement in Intel's single-threaded performance since 2015. This is likely to stimulate a wave of upgrades and new purchases, but with the chips still not on the market, that obviously hasn't happened yet.

Surface revenue showed a healthy increase, growing 39 percent to $1.9 billion, with the company reporting growth across both consumer and corporate sales. Gaming revenue was also up some 8 percent, driven by 31-percent growth in software and services revenue, against a 19-percent decline in hardware revenue. Xbox Live monthly active users hit 64 million, up 8 percent. CEO Satya Nadella says that gaming continues to be an area of investment for the company; it has bought a number of studios over the last year. Nadella also said that the xCloud streaming service—which should bring console quality gaming to smartphones, slim set-top boxes, consoles, and PCs—will begin public trials later this year. The company is also investing in gaming infrastructure, with Nadella claiming that PlayFab, acquired last year, has surpassed one billion player accounts.

112 Reader Comments

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

No possibility that it might possibly be connected to the update debacles? None whatsoever? Just...all in on "chip supplies were the biggest reason we couldn't make money"?

Or,

Less PCs being made, Less chances for Windows to be purchased and installed. Less PCs being made due to Chip shortage.

Just because of one oops update, suddenly so many people switched to Linux? I don't think so. It MAY be a contributing factor, but the fact MSI, Asus, Gigabyte, EVGA and other Motherboard Manufactures report loss sales due to chip shortage, and companies like Acer and HP also... I'm leaning towards agreeing with MS on this one.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

Good tech <> sales success

And I'm glad these these aren't mutually inclusive. If companies cancelled a good product every time it didn't sell like hotcakes, we'd all be driving Camrys and Suburbans and eating McChickens.

The PC/console gap is less noticeable every year it seems, as major titles seem to move away from photo-realistic graphics, and diminishing returns on polygon and lighting effects occur. Im sure computers will be eventually able to render images in real time indistinguishable from real life, but will game studios have the resources to hire artists to make game worlds with such detail? The big difference to me, that cant be overcome, is control. I can never play a game like factorio on my phone or PS4.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

Yeah the Surface turned out not to be an iPad killer, but it did turn out to be a great PC for people that need or (the mind boggles) want Windows. This is the same company that had the iPhone death march on release on WP7. But at least they were aiming high?

Claiming that Skylake improved single-threaded performance is somewhat generous (it did improve thermals a tiny bit, allowing higher clocks in notebooks); I'd put the last single threaded performance improvement with Haswell in 2013, and in most people's minds it's still Sandy in 2011 that was the big one. Ice Lake looks like it'll mostly boost cache size and memory speed -- by a lot in both cases -- so while it may still fall short of expectations for an architecture overhaul, it's almost guaranteed to be the biggest IPC bump in years.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

These services aren't meant for us. These are meant for my brother in law who just logs in at the end of the day for an hour to decompress. Being able to do it anywhere in a fairly hardware agnostic way would make this easier and cheaper for your supercasual gamer. A bit of latency isn't going to bother him.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

I think the main driver for MS is server and business PC adoption. I just don't see that many Server 2016 deployments yet. While many companies are doing Windows 10 rollouts, they doesn't improve their bottomline since companies get Windows/Office upgrades via Subscriptions. Many companies just aren't buying many new PCs. One area that maybe killing Windows is in Education and retail where many schools have flipped over to Chromebooks and many retails switched from using Windows terminals for POS to Square POS. Often you see a stand in the mall that used to have a laptop or PC to handle payments. Now they use Square with just an iPad. The other area is MS is a non-player in the devices market. No mobile presence. XBox is doing ok but not as well as Nintendo or Sony.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

39% increase in sales is not a failure.

If you start with numbers near zero, it doesn't take many to produce a large percentage increase.

Thank god they're not pushing annualized licensing on Windows. The longer Microsoft practices perpetual licensing the better off consumers will be. It's almost too bad they can't make the product entirely free seeing that it's essential to their other business groups. They already capture a ton of personal data similar to Google that's no doubt being resold/shared.

Hitting a user with purchasing a $100~200 product key after replacing hardware in their computer also stifles hardware upgrades. I really wish Microsoft could just do away with charging for the OS all together and allow the other divisions to carry the company. It might also increase Windows attach rates and further increase sales for their other divisions.

The PC/console gap is less noticeable every year it seems, as major titles seem to move away from photo-realistic graphics, and diminishing returns on polygon and lighting effects occur. Im sure computers will be eventually able to render images in real time indistinguishable from real life, but will game studios have the resources to hire artists to make game worlds with such detail? The big difference to me, that cant be overcome, is control. I can never play a game like factorio on my phone or PS4.

//Im sure computers will be eventually able to render images in real time indistinguishable from real life, // ... except that when you reach out to touch them, there's nothing there except the flat surface of a monitor. That part is pretty distinguishable.

Nadella also said that the xCloud streaming service—which should bring console quality gaming to smartphones, slim set-top boxes, consoles, and PCs—will begin public trials later this year.

Quite delusional.

Doesn't mean they aren't going to or shouldn't try. There are probably lots of issues to sort out, but most long time gamers are going to be skeptical until they see input lag is NOT a problem.

Latency is such a big problem that Microsoft is trying to use AI to predict gamers input and send frames in advance. If the prediction is wrong, then they say that “frames will be locally warped”... whatever that means.

Meanwhile, mobile chips are becoming more and more powerful, easily surpassing the Nintendo Switch console capabilities, which is a clear example of what gamers want (i.e. fun games and no latency). Look at games like the latest Zelda, and you will see that even a mobile-class chip can render beautiful images if driven by skilled coders and artists.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

Yeah the Surface turned out not to be an iPad killer, but it did turn out to be a great PC for people that need or (the mind boggles) want Windows. This is the same company that had the iPhone death march on release on WP7. But at least they were aiming high?

Overall good quarter, still printing money.

Is it even that? Most PC users say NO to the Surface as well. Granted a lot of that is price, but truly great products inspire people to spend more.

People choose not to buy products for a variety of reasons: price, performance, repair-ability. I own a Surface Pro 3 and it's a dynamite little computer to this day.

There hasn't been a serious jump in consumer PC performance in nearly a decade, so that has to hamper sales. If you've got a Sandy Bridge quad core and 4gb of RAM you've still got a functional productivity machine. That definitely has taken away a lot of the motivation to buy new stuff and thus new Windows copies.

If you're a high end gamer, there's been improvement in the huge core count systems and GPU improvements, but if you're in the market for basic Office apps and internet browsing....you really haven't had to upgrade in a long time.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

Its almost like Apple and MS have different bars to measure success for hardware ventures.

Which would be fine if all the reviews said “It’s great... for a Microsoft product, but worse than a mediocre Apple product.” But they don’t. Being clear about what bar you’re using is part of writing an honest review.

This isnt about reviews.This is about sales.Apple selling $1 billion worth of a new laptop model would probably be seen as a failure, as they normally do more than that.MS selling $1 billion worth of a new laptop model would probably be seen as a success since they normally do less than that. (Edit: I pulled those numbers out of thin air for demonstration purposes, but you get the idea)

This is entirely regardless of the quality of the product, and even a great product (apple watch) may sell poorly at first. Which may make it a commercial failure, despite its quality.

Thank god they're not pushing annualized licensing on Windows. The longer Microsoft practices perpetual licensing the better off consumers will be. It's almost too bad they can't make the product entirely free seeing that it's essential to their other business groups. They already capture a ton of personal data similar to Google that's no doubt being resold/shared.

Hitting a user with purchasing a $100~200 product key after replacing hardware in their computer also stifles hardware upgrades. I really wish Microsoft could just do away with charging for the OS all together and allow the other divisions to carry the company. It might also increase Windows attach rates and further increase sales for their other divisions.

Let Windows be the gateway drug to the Microsoft ecosystem.

Perpetual licensing does not imply perpetual support, or even perpetual operation. MS can withdraw support of Windows 10 on a device with about 1 year's notice, when they decide (or are forced to by hardware OEM inaction regarding drivers) that some part of a computer system is no longer compatible with what they want you to have for Windows. The 10-year support lifecycle no longer exists with consumer versions of Windows 10. That said, MS has been remarkably tolerant of most olde hardware so far with Windows 10; let's hope it continues.

5G should allow lower latency in the air loop. Combined with deploying services closer to the wireless network you 'could' achieve significantly lower latency. It won't be as low latency as local GPU but if anything the last decade has shown us it is that "good enough" can win. 4K streaming is technically inferior to 4K Bluray yet 4K streaming is very popular. Are you going to do 120 Hz twitch shooters with remote GPU? Probably not but there are plenty of games which can handle higher input latency.

Look I don't think this is happening next year (at least not well) but probably worth throwing a little R&D money at it. 5 or 10 years from now it certainly seems possible.

Interesting. So the Surface, which were always told is some amazing iPad killing innovation, earns much less revenue than the Apple Watch, which we were told was a failure for its first three years. Ok.

I don't quite get your comparison here. I mean, the Apple watch is like $300 something.....vs a Surface, which tends to be pretty pricey at the $800-1600 price range depending on the features. It's the one reason I've never gone ahead an bought one myself - very expensive and unjustifiable, considering I already have a laptop (MacBook Pro), and I use my PC largely for gaming.

Obviously, the more expensive product will most likely sell less volume overall. And the Surface was never billed as an iPad killer...but rather, an actual laptop replacement tablet. The whole selling point of the Surface was not that it was a "tablet" in and of itself, but rather, and actual function full "Windows PC" in the form factor of a tablet.

Also, Apple Watch failure comparisons were probably done against its (Apple's) other products - i.e., in comparison to their other products, its sales were vastly inferior.